Rich muni investors will demand and receive higher yield if their bonds become taxable... which will be delivered via the increased property taxes paid by the majority of the population (homeowners and indirectly renters - except those living in subsidized housing). An alternative is infrastructure decaying even faster than it does now due to less money available (muni bonds are for capital projects, not payroll). If the Feds subsidize the bonds' interest (like for BAB bonds), taxing the bondholder and then returning the same amount to him as an interest subsidy doesn't make sense. If the bondholder is a foreign entity (as is the case for many BABs) the subsidy goes abroad without helping the tax base.